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ARC Resources Again Lowers Capex, Moderates Guidance for 2015

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   |    Thursday,April 30,2015

ARC Resources Ltd. has reported its first quarter 2015 operating and financial results.

First quarter production averaged a record 120,354 boe per day and funds from operations were $191.5 million ($0.57 per share).

2015 Outlook

• On January 7th, 2015, in response to the deterioration of commodity prices late in 2014, ARC announced a reduction to its 2015 capital program from $875 million to $750 million. Since that date, commodity prices have continued to be depressed, which has resulted in a further reduction to ARC's 2015 capital program to approximately $550 million. 
• While we continue to see significant long-term value throughout our entire asset base, capital spending will primarily be focused on the British Columbia region for the remainder of 2015 in order to maximize value during the current period of low commodity prices. 
• The 2015 capital budget includes spending on strategic long-term development and infrastructure projects at Sunrise and Tower, which create additional productive capacity and set the stage for long-term profitable growth. ARC's 2015 capital program is dynamic and capital will be allocated to the highest rate-of-return projects in response to market conditions during 2015.
• The reduced 2015 capital program together with net proceeds from the January 2015 equity offering will preserve ARC's strong financial position and provide financial flexibility to execute capital programs through the current period of depressed commodity prices. Ongoing commodity price volatility may affect ARC's funds from operations and rates of return on capital programs. As further volatility is expected, ARC will continue to take steps to mitigate these risks, focus on capital discipline and protect its strong financial position.
• ARC's 2015 full year guidance has been revised to incorporate reduced 2015 capital spending of approximately $550 million. 
• Reflecting this 37 per cent reduction in capital spending, and the sale of approximately 2,400 boe per day of shallow gas properties in the second quarter of 2015, ARC's full year average production guidance was revised downward to a range of 113,000 to 116,000 boe per day. 
• ARC expects production to decrease in the second and third quarters of 2015 due to turnaround and maintenance activities and increase in the fourth quarter of 2015 upon commissioning of the new Sunrise gas plant and expanded Tower oil battery. ARC's full year guidance for per boe operating costs was lowered to a range of $8.20 to $8.50 per boe to reflect the deferral of certain discretionary expenditures to future periods and expected operating cost savings in 2015. 

Q1 Highlights

• strong>ARC achieved record first quarter production of 120,354 boe per day, 14 per cent higher than the first quarter of 2014 and two per cent higher than the fourth quarter of 2014. ARC achieved record quarterly natural gas production of 460 MMcf per day as a result of new wells coming on-stream at Sunrise. First quarter 2015 liquids production decreased slightly relative to 2014 levels due to lower capital activity late in 2014 and early 2015 in response to declining crude oil prices. However, liquids production remained strong at 43,756 barrels per day due to new production coming on-stream at Parkland/Tower over the course of 2014.
• strong>Construction continued on the new 60 MMcf per day Sunrise gas processing facility; construction is on schedule and on budget. All major equipment is on site and a significant portion of mechanical installation was completed during the first quarter. ARC plans to commission the new facility in the fourth quarter of 2015 and expects to fill the facility by early 2016.
• strong>First quarter 2015 capital expenditures of $129.5 million were focused primarily on ARC's Montney lands in northeastern British Columbia and northern Alberta. 
• strong>ARC drilled 25 gross operated wells in the first quarter of 2015 (17 oil wells, two liquids-rich natural gas wells and six natural gas wells). ARC's first quarter 2015 activity levels were significantly lower than 2014 levels as certain capital projects were deferred to future periods in response to the decline in commodity prices.
• Subsequent to March 31, 2015, ARC divested certain non-core shallow gas assets located in southern Alberta with associated production of approximately 2,400 boe per day (98 per cent natural gas) and 12 MMboe of proved plus probable natural gas reserves. The divested properties were characterized by low netback wells with a higher relative cost profile compared to our natural gas properties in the Montney region. The divested properties comprised approximately 2,200 gross shallow gas wells (1,600 net wells), thereby reducing ARC's well count and associated abandonment liability. Proceeds from the divestment of approximately $12 million were received following quarter end.
• ARC's core principle of operational excellence was demonstrated in the first quarter of 2015 through several on-going initiatives which resulted in lower operating costs and improved capital and operating efficiencies. With the decrease in commodity prices, ARC is focused on cost management by pursuing opportunities to reduce costs and/or defer certain discretionary spending when appropriate. ARC's first quarter 2015 operating costs of $7.24 per boe decreased 19 per cent from $8.97 per boe in the first quarter of 2014 due to continued growth of our low cost Montney production, lower electricity prices and realized cost savings.
• ARC closed the quarter with a strong balance sheet including total available credit facilities of $2.3 billion and debt of $1,065.9 million drawn. At March 31, 2015, ARC had available credit of $1,309.5 million taking into account ARC's working capital deficit. Net debt to 2015 annualized funds from operations ratio was 1.2 times and net debt was approximately 11 per cent of ARC's total capitalization at the end of the first quarter; both metrics are well within ARC's target levels.
• In response to the rapid decline in crude oil prices, and to provide greater certainty for ARC to pursue its planned 2015 capital programs, ARC issued 17.9 million common shares on a "bought deal" basis at a price of $22.55 per common share for gross proceeds of $402.7 million in January 2015. Proceeds from the equity offering further strengthened ARC's balance sheet, preserving ARC's strong financial position through the downturn in commodity prices.
• strong>Owing to the weakening sectoral fundamentals, ARC has reduced its planned 2015 capital program to approximately $550 million from $750 million to preserve its strong financial position while remaining focused on the long-term and advancing key strategic projects. 
• strong>Our 2015 planned capital program will focus primarily on profitable development in the British Columbia Montney region as these projects provide the highest rates of return at current commodity prices. We continue to see significant long-term value throughout our asset base and will resume development activities in other areas as reduced service costs are secured and economic conditions improve. ARC has revised 2015 full year average production guidance to a range of 113,000 to 116,000 boe per day as a result of the reduced 2015 capital program and divestment of non-core shallow gas properties early in the second quarter of 2015. As a result of significantly reduced drilling and completion activities in the first and second quarters of 2015 and scheduled maintenance activities in the second and third quarters, ARC expects quarterly production to decline to 107,000 to 110,000 boe per day in the second quarter and 104,000 to 107,000 boe per day in the third quarter. Based on the planned start-up of the new Sunrise gas plant and expanded Tower oil battery, production is expected to increase to 122,000 to 126,000 boe per day in the fourth quarter. Assuming a 2016 capital program of approximately $600 million, ARC expects that full year 2016 production should be in the range of 122,000 to 126,000 boe per day. ARC is well positioned to fund the planned 2015 capital program and the Dawson development in 2017 given its strong balance sheet and proceeds received from the issuance of equity earlier this year.

Organizational Update

• Mr. David Carey, Senior Vice President Capital Markets, has announced he will be retiring in the second half of 2016. Mr. Carey joined ARC in 2001 as Vice President, Business Development and has held the position of Senior Vice President Capital Markets since 2006. Over the past 14 years, David has provided exceptional leadership and has been instrumental in raising ARC's profile in the capital markets. Early notice of David's departure is being provided to facilitate succession planning.

Operating Netbacks

• ARC's first quarter 2015 operating netbacks of $15.91 per boe before hedging and $20.03 per boe after hedging were 59 per cent and 45 per cent lower than the first quarter of 2014, respectively, due to significantly lower crude oil and natural gas prices.
• ARC's first quarter 2015 total corporate royalty rate of 9.9 per cent ($2.80 per boe) was down from 14.5 per cent ($8.41 per boe) from the first quarter of 2014 due to significantly lower average realized crude oil and natural gas prices in 2015.
• First quarter 2015 operating expenses of $7.24 per boe were 19 per cent lower than the first quarter of 2014. Lower per boe operating expenses were attributed to higher production, certain realized cost savings, the addition of new production at lower relative operating costs, and lower average electricity costs in 2015 relative to 2014.
• First quarter 2015 transportation costs increased to $2.36 per boe, up $0.45 per boe from the first quarter of 2014. Higher transportation costs were primarily due to ARC taking control of transportation arrangements for a larger portion of production in order to more effectively move its production to market. Generally this results in additional transportation costs, but in most cases is offset by higher revenue received for its products. ARC incurred higher transportation costs associated with increased liquids production at Parkland/Tower during the first quarter of 2015 as the majority of liquids production at Parkland/Tower was being trucked. Moving forward, ARC expects transportation costs at Parkland/Tower to decrease as 100 per cent of liquids production will be transported by pipeline in the second half of 2015.

Operational Review

• ARC's capital spending and activity levels declined through the first quarter in response to the depressed commodity price environment with total spending of $129.5 million, before land and net acquisitions. ARC drilled 25 gross operated wells (17 oil wells, two liquids-rich gas wells and six natural gas wells) focused primarily on our Montney assets in northeastern British Columbia and northern Alberta. A significant portion of ARC's first quarter capital activity was focused in the British Columbia Montney region, with 14 gross operated wells drilled and construction proceeding on key infrastructure projects at Sunrise and Tower. While ARC drilled 25 gross operated wells in the first quarter of 2015, certain completions were deferred to future periods pending the improvement in economic conditions and/or realization of additional cost savings. By the end of the first quarter, ARC had reduced its active rigs to two, down significantly from 12 active rigs running in the first quarter of 2014. Likewise, ARC completed just 10 wells in the first quarter of 2015, down significantly from 34 wells completed in the first quarter of 2014.
• ARC achieved record first quarter production of 120,354 boe per day, 14 per cent higher than the first quarter of 2014. ARC's first quarter natural gas production was a record of 460 MMcf per day (64 per cent of total production) and first quarter crude oil and liquids production was 43,756 barrels per day (36 per cent of total production). Increased first quarter 2015 total production, relative to the first quarter of 2014, was due to new wells brought on production at Sunrise through a third party facility and significantly higher production at Parkland/Tower attributed to filling of the new processing facility, offset in part by approximately 2,400 boe per day of production from shallow gas assets divested in the second quarter of 2014. ARC's first quarter 2015 production was two per cent higher than the fourth quarter of 2014 due primarily to higher Sunrise production from new wells brought on-steam through third party facilities late in the fourth quarter of 2014, offset in part by slightly lower production at Parkland/Tower in the first quarter of 2015 due to downtime attributed to repair and maintenance activities at the 3-9 gas processing and liquids handling facility.
• Given the rapid deterioration in crude oil prices late in 2014, ARC has further reduced its 2015 capital budget from $750 million to approximately $550 million. ARC has reduced its 2015 capital program by 37 per cent from the original 2015 capital program of $875 million announced on November 5, 2014. ARC expects a considerable portion of the planned 2015 capital program to be directed to the British Columbia Montney region with estimated total spending of approximately $340 million focused predominantly on drilling at Tower, Sunrise and Dawson to keep facilities full. With service cost reductions of approximately 20 per cent, ARC expects year-over-year production growth despite the significant capital reduction in 2015.
• strong>With the considerable reduction to ARC's 2015 capital program, and the sale of 2,400 boe per day of low netback shallow gas production in 2015, ARC's 2015 annual average production volume guidance has been revised to a range of 113,000 to 116,000 boe per day. Following strong first quarter 2015 production of 120,354 boe per day, ARC expects second quarter production to decrease to a range of 107,000 to 110,000 per day due to planned third party turnarounds impacting Parkland/Tower, production maintenance and natural production declines throughout the asset base. ARC expects third quarter production to decrease further to a range of 104,000 to 107,000 boe per day due to downtime attributed to a significant planned turnaround at Dawson. ARC expects a significant increase in fourth quarter 2015 production to a range of 122,000 to 126,000 boe per day following commissioning of the new Sunrise gas processing facility and expanded Tower oil battery.
• Capital plans and spending may be revised throughout 2015, as necessary, in response to market conditions.

Parkland/Tower

• ARC has a land position of 23 net sections at Parkland, a Montney liquids-rich natural gas play, located in northeastern BC. ARC's Tower property consists of 57 net sections of contiguous land north and west of the Parkland field, producing predominantly light oil and free condensate with additional liquids in the gas stream; therefore providing favorable economics.
• During the first quarter of 2015, ARC spent $23.2 million on capital activities at Parkland/Tower. ARC drilled two gross operated liquids-rich natural gas wells at Parkland and six gross operated oil wells at Tower during the first quarter of 2015. Parkland/Tower production averaged 24,400 boe per day in the first quarter of 2015 (26 per cent crude oil and liquids and 74 per cent natural gas), a 47 per cent increase from the first quarter of 2014 due to new production brought on-stream to fill the new facilities through the course of 2014. First quarter Parkland/Tower production was down five per cent relative to the fourth quarter of 2014 due to downtime attributed to repair and maintenance activities at the 3-9 gas processing and liquids handling facility.
• Well performance at Tower continues to be exceptional. The E8-15 well surpassed 100,000 barrels of oil cumulative production in seven months on production and the F8-15 well surpassed 100,000 barrels of oil cumulative production in six months on production. Through the first quarter of 2015, ARC has completed drilling of eight wells on the 8-24 pad and plans to complete and bring all wells on production in 2015.
• Through the first quarter of 2015, all NGL production from Parkland and a significant portion of oil production at Tower was transported by truck due to limited pipeline infrastructure. Early in the second quarter of 2015, with the completion of certain third party pipeline expansion projects, ARC commenced the flow of 100 per cent of oil production at Parkland/Tower via pipeline. ARC expects 100 per cent of NGL production at Parkland/Tower will be tied-in and transported via pipeline in the second half of 2015. With this change, ARC anticipates a reduction in per boe transportation costs at Parkland/Tower given the lower costs associated with transporting by pipeline relative to trucking.
• ARC expects to spend approximately $170 million at Parkland/Tower in 2015 to drill a total of 24 gross operated wells (22 oil wells at Tower and two liquids rich natural gas wells at Parkland). Given the strong results to date at Tower, ARC expects a considerable portion of the 2015 drilling program to be directed at Tower. At Parkland, ARC currently does not anticipate any additional wells to be drilled in 2015 and has deferred certain Parkland well completions to later in 2015. ARC expects 2015 annual production at Parkland/Tower to average approximately 24,000 boe per day, approximately 10 per cent higher than average 2014 production. Total oil and liquids production at Parkland/Tower is expected to increase 11 per cent relative to 2014. ARC expects Parkland/Tower production to increase in the fourth quarter as incremental oil and liquids production is brought on-stream through the new Tower liquids handling facility, increasing liquids handling capacity from 5,000 barrels per day to 10,000 barrels per day.

Sunrise

• At Sunrise, a natural gas Montney play in northeastern BC, ARC has a land position of 32 net sections. The Sunrise property has a significant natural gas resource base, low capital and operating costs, and potential for multilayer development, resulting in high rates of return even at relatively low natural gas prices. ARC has been piloting production at Sunrise since the third quarter of 2011 through third party facilities, and is currently producing from four layers of the Montney. First quarter 2015 Sunrise production was approximately 72 MMcf per day of natural gas production, up 200 per cent relative to the first quarter of 2014 due to new wells brought on-stream.
• During the first quarter of 2015, ARC spent $47 million on capital activities at Sunrise to drill five gross operated horizontal natural gas wells and proceeded with construction of an ARC operated 60 MMcf per day gas processing facility. The new facility is on schedule and on budget and the first quarter saw considerable activity; all major equipment is on site and a significant portion of mechanical installation was completed during the first quarter. ARC plans to commission the new facility in the fourth quarter of 2015 and expects to fill the facility by early 2016.
• The Sunrise project continues to have robust economics even at low gas prices and is expected to be a source of long-term value creation. During 2015, ARC plans to spend approximately $130 million at Sunrise for development drilling and infrastructure spending to complete and commission the new 60 MMcf per day Sunrise gas processing facility. ARC plans to drill thirteen gross operated natural gas wells at Sunrise in 2015 leading up to the on-stream date of the new facility. ARC expects 2015 Sunrise production to average 83 MMcf per day in 2015; a greater than 100 per cent year-over-year increase in production relative to 2014. Sunrise production will increase to greater than 120 MMcf per day once the new, ARC operated facility is full. ARC expects a substantial portion of the new facility capacity to be filled shortly within the on-stream date, with the remaining capacity to be filled by early 2016.

Dawson

• ARC's Dawson Montney play is the foundation of ARC's profitable low cost natural gas business. Dawson production averaged 168 MMcf per day of natural gas and 870 barrels per day of condensate and liquids during the first quarter of 2015, a six per cent increase in total production relative to the first quarter of 2014. Dawson continues to perform well, delivering robust economics and significant cash flow at current natural gas prices due to exceptional well results, excellent capital efficiencies and low operating costs.
• ARC spent approximately $5 million on capital activities at Dawson during first quarter of 2015 and drilled one gross operated natural gas well. During the fourth quarter of 2014, ARC drilled and completed two liquids-rich natural gas wells into the Lower Montney to assess the potential for higher liquids content; one of the lower Montney wells was brought on production during the first quarter of 2015 and tie-in for the second lower Montney well is scheduled for early in the third quarter of 2015. The lower Montney well is currently producing at a restricted rate due to facility constraints, however early results are encouraging with 2.2 MMcf per day of natural gas and 50 barrels per MMcf of free condensate over a period of two months and producing with a stabilized casing pressure of 1,200 psi against pipeline constraints. In addition, ARC expects the NGL recovery for the lower Montney well will be approximately 35 barrels per MMcf. ARC has realized improved well performance at Dawson with refinements in completion techniques, leveraging the learnings from new wells at Sunrise.
• ARC plans to maintain production at current facility capacity levels through 2015 and into 2016. During 2015, ARC plans to spend approximately $45 million at Dawson to drill nine gross operated natural gas and liquids rich natural gas wells. ARC plans to push outside of the existing Dawson core to pursue the potential for higher liquids content. During 2015, ARC expects production to be relatively flat at facility capacity levels over the course of 2015 with the exception of lower production in the third quarter of 2015 due to a scheduled turnaround on the 120 MMcf per day Dawson facility which is expected to last approximately two weeks.
• Given the significant drilling inventory at Dawson and the potential for higher liquids production, ARC plans to proceed with a new 90 MMcf per day gas processing and liquids handling facility at Dawson, which is currently planned to be on-stream in 2017. The new facility will have gas processing capacity of 90 MMcf per day and approximately 7,500 barrels per day of liquids handling capacity (approximately 50 per cent condensate). ARC submitted an application for the new facility during the first quarter of 2015 and expects the regulatory review/approval process to take approximately six to eight months. The timing of the start-up of the new Dawson facility is dependent upon receiving all required regulatory approvals, efficient construction of the facility, and approval of a 2016 capital budget that provides appropriate funding.

Attachie

• At Attachie, a liquids-rich natural gas Montney play located in northeast BC, ARC has a land position of 152 net sections. To-date, ARC has drilled and tested four horizontal pilot wells, two horizontal wells on the western portion of the lands and two wells on the eastern portion of the lands.
• First quarter 2015 production at Attachie averaged approximately 700 boe per day (40 per cent condensate). Attachie production stabilized in the quarter following resolution of plant maintenance and liquids handling issues at a third-party facility.

Ante Creek

• ARC has a land position of 339 net sections at Ante Creek, a Montney oil and natural gas play in northern Alberta with significant future growth potential. Ante Creek production averaged 17,100 boe per day (approximately 50 per cent oil and liquids) during the first quarter of 2015, down six per cent relative to the first quarter of 2014. Strong production entering 2014 was due to low gas-oil-ratios in our Coquina wells which came on-stream in late 2013 and early 2014. Ante Creek production was relatively flat compared to the fourth quarter of 2014 due to reduced activity levels starting in late 2014 and the deferral of well completions which resulted in limited new production coming on-stream.
• During the first quarter of 2015, ARC spent $32 million on capital activities at Ante Creek and drilled five gross operated oil wells. ARC deferred the completions for certain wells drilled in the fourth quarter of 2014 and first quarter of 2015 to future periods pending the improvement in economic conditions and/or realization of additional cost savings. ARC plans to spend approximately $30 million at Ante Creek during the remainder of 2015 to complete existing wells and focus on maintenance and optimization activities. Given the limited capital investment at Ante Creek in 2015 and deferral of certain capital projects, ARC expects Ante Creek production to decrease slightly over the course of 2015 to average approximately 16,500 boe per day. Over time as economic conditions improve, ARC plans to continue to delineate this large, prospective land base and continues to assess infrastructure requirements in conjunction with future development plans for Ante Creek.

Pembina

• ARC's Pembina Cardium assets continue to deliver strong well performance, resulting in first quarter 2015 production of approximately 12,200 boe per day (82 per cent light oil and liquids). First quarter 2015 Pembina production increased eight per cent relative to the first quarter of 2014. First quarter Pembina production was relatively unchanged compared to fourth quarter 2014 production.
• During the first quarter of 2015, ARC spent $7 million on capital activities at Pembina and drilled a total of four gross operated Cardium horizontal oil wells. ARC deferred the completions for all wells drilled in the first quarter of 2015 to future periods pending the improvement in economic conditions and realization of additional cost savings. ARC plans to spend approximately $35 million at Pembina during the remainder of 2015 to complete existing wells and focus on maintenance and optimization activities. Given the limited capital investment at Pembina in 2015 and deferral of certain capital projects, ARC expects Pembina production to decrease slightly over course of 2015 to average approximately 11,000 boe per day.

Southeast Saskatchewan and Manitoba

• ARC's Southeast Saskatchewan and Manitoba region contributes high quality crude oil. First quarter 2015 production in this region averaged approximately 10,800 boe per day of light oil, down marginally from the first quarter of 2014 and fourth quarter of 2014. Lower first quarter production was due to reduced activity levels starting in late 2014 including the deferral of drilling and well completions which resulted in limited new production coming on-stream.
• ARC spent approximately $10 million on development and optimization activities on operated and non-operated properties in this region in the first quarter of 2015 including the drilling of two gross operated oil wells. ARC plans to spend approximately $30 million in this region over the remainder of 2015 on operated and non-operated properties to complete existing wells and focus on maintenance and optimization activities. Given the limited capital investment in 2015 and deferral of certain capital projects, ARC expects production in this region to decrease over course of 2015 to average approximately 9,700 boe per day.